The Statewide Title Newsletter and Legal Memorandum

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Issue  136  Article  227
Published:  11/1/2006

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Contracts Perilous Ground for Practitioners
Chris Burti, Vice President and Legal Counsel

At times, it has been sarcastically cautioned that attorneys drafting installment land sales contracts should regularly review their errors and omissions coverage. The primary reasons for using this form of financing is to either, avoid the cost and expense of foreclosure upon default or to avoid a due on sale clause in the seller's existing financing. The reason for the hyperbole is that there is little, if any, likelihood of achieving either objective. The cases in North Carolina are so consistent and clear that these transactions both, trigger a due on sale clause and create an equity of redemption that must be extinguished, that many experienced real estate attorneys simply refuse to draft installment land sales contracts as a matter of policy.

 Watson v. Defendant Miller Creek Lumber Co., Inc., COA05-1537, filed on July 18, 2006 is a unanimous decision of the North Carolina Court of Appeals that may serve to reinforce such policies. In this case the plaintiffs sought to enforce their rights in a 1991 contract after the defendant seller deeded the property to the other defendant. The trial court entered an order of summary judgment in favor of the defendant buyer and the plaintiffs appealed.

In 1991, the plaintiffs agreed to purchase a five-acre tract of land in Caldwell County from the defendant seller. The plaintiffs and the defendant seller entered into a written installment land contract wherein the plaintiffs agreed to pay the balance of the purchase price plus interest over a three-year period. Upon payment in full of the purchase price, defendant seller agreed to deed the property to the purchasers. The contract was captioned as a "Bond for Title" and recorded in the Caldwell County Registry. The plaintiffs fully performed the contract, but the defendant seller never delivered a deed to the plaintiffs. In 2003, the defendant seller conveyed the land to defendant buyer who recorded his deed in the Caldwell County Registry. In 2004, the plaintiffs filed a complaint alleging and after numerous filings, the trial court denied the plaintiffs' motion for summary judgment, granted the defendant buyer's motion for summary judgment, and dismissed the action against him. The plaintiffs contended that the trial court erred in granting the defendant's motion for summary judgment because the contract they entered with defendant seller and registered is entitled to the protection of the Connor Act, N.C.G.S. 47-18 as against a subsequent purchaser for value. With appropriate citations the Court of Appeals notes that when both parties file motions for summary judgment, there is implicit agreement that there are no issues of material fact on appeal, that the Court of Appeals' review of the grant of a summary judgment motion is de novo.

The court recites a conventional analysis of the purpose, requirements and effect of the Connor Act, N.C. Gen. Stat. § 47-18 (2005). Citing Chandler v. Cameron, 229 N.C. 62, 66, 47 S.E.2d 528, 530 (1948), the Court observes that "the act requires recordation of all ... contracts to convey ... affecting the title to real property."   The opinion cites that the North Carolina Supreme Court has determined "[o]ne who has a contractual right to compel another to convey is, upon the recordation of the contract, accorded the same protection as a grantee in a recorded deed." Quinn v. Thigpen, 266 N.C. 720, 723, 147 S.E.2d 191, 193 (1966) (emphasis added). The Court's conclusions are brief and cogent, therefore we present them in their entirety in lieu of discussion. " The case sub judice is similar to Clark v. Butts, 240 N.C. 709, 83 S.E.2d 885 (1954). In Clark, plaintiff Annie Clark ("Clark") and defendant Jonas Askew ("Askew") signed a contract whereby Clark agreed to care for Askew, whose health was in decline, and in return, Askew agreed to grant Clark a life estate in his house and lot. Clark, 240 N.C. at 710, 83 S.E.2d at 886. Clark registered the contract in the Camden County Register of Deeds on 16 June 1942. Id. 240 N.C. at 711, 83 S.E.2d at 887. Three years later, Askew conveyed his house and lot to Johnnie Butts ("Butts"). Id. Butts recorded his deed in the Camden County Register of Deeds on 19 May 1945. Id. Clark filed a complaint against Butts asking the trial court to declare her the owner of Askew's house and lot. Id. The trial court declared Clark the owner and our Supreme Court agreed stating "the contract ... was registered nearly three years before the deed from Askew to[Butts] was executed. The registration of [the contract] was constructive notice to [Butts]." Id. 240 N.C. at 715, 83 S.E.2d at 889. Further, our Supreme Court concluded "whatever rights [Butts] acquired by the deed from Askew ... were subservient to the rights of [Clark] under her prior registered contract[.] "Id." "In the instant case, the plaintiffs' contract with the defendant seller entitled them to "a good and sufficient deed" effective "[u]pon ... payment in full of said purchase price." It is uncontested that plaintiffs paid the purchase price in full in November 1994. Further, plaintiffs contend and the defendant seller admits after receiving the final payment the deed was never delivered to plaintiffs. All parties stipulated that the contract was recorded in the Caldwell County Register of Deeds on 8 November 1991. The parties also stipulated that defendant seller conveyed the disputed property to defendant Counts by deed eleven years later and defendant Counts recorded the deed in the Caldwell County Register of Deeds on 3 January 2003. Pursuant to Clark, supra, plaintiffs possessed superior rights to the land since their contract was recorded prior to recordation by defendant Counts." "Furthermore, pursuant to Rule 36 of the North Carolina Rules of Civil Procedure, defendant Counts is deemed, by virtue of his failure to respond to plaintiffs' request for admissions, to have admitted he not only had both actual and constructive knowledge of plaintiffs' recorded "Bond for Title," but also took title to the land subject to plaintiffs' recorded "‘Bond for Title.'"

 "Consequently, plaintiffs possess superior title to the land. Therefore, the trial court's grant of summary judgment to defendant Counts is reversed." The legal implications of the decision should be straightforward, as the conclusions of the Court seem to be clearly compelled by the language of the Act and should come as no surprise. The facts of the case will likely lead to more significant implications for title examiners. This litigation arose approximately thirteen years after the recording of the contract and almost a decade after its scheduled completion. It is absolutely clear that title examiners discovering an installment land sales contract in the chain of title of the locus in quo that has been recorded, but not extinguished, can ignore it only at great peril. One can not assume that it terminated due to default on the part of the buyer and one can not rely on the bare assertions of the seller. It must be terminated or satisfactory evidence of default and disavowance by the buyer must exist in order to convey marketable title in the first instance or insurable title in the latter. Note that our courts have consistently held that these contracts are essentially mortgages and the buyer holds an equity of redemption that must be extinguished. This doctrine imposes a burden upon the seller to take affirmative action to clear the title problem created by the recording of one of these contracts.

Statewide Title fully complies with North Carolina law in requiring an opinion of title from an independent licensed attorney before issuing a commitment or policy of title insurance.
Relevant Statutes: 58-7-15(18) 84-2.1 58-26-1 84-4 84-8
Report Violations to: NC State Bar NCDOI

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